Anthony Hilton: Payday lenders play an essential role

Thursday 27 June 2013 11:36 BST

Cash

At a recent conference on the future of financial services one of the themes was that most of the companies active in the industry had lost touch with their customers, and had no real idea of what they wanted any more so they kept inventing things no one really needed and then had to go to extreme lengths to get them sold.

There was, however, one shining exception to all this, a section of the industry which had a clear unvarnished vision of who its customers were, what they needed and how their demands could be met. This was the payday loan industry.

It understood that if its customers got to the end of the month and there was not enough money to pay the rent, buy a tank of petrol to get to work or to buy food for the family, then they needed cash in a hurry.

Usually they did not need a large sum; often they did not need it for more than a few days.

But they needed it immediately and they needed it so badly they were not too bothered about how much they had to pay for it.

This was not what that sophisticated City audience wanted to hear and it would certainly not have gone down well in Parliament had it been heard there because in that forum the industry is frequently reviled.

The profile of the industry inside and outside Parliament is much higher today than a few years ago because as the recession has bitten into personal incomes, the market for the emergency funds it provides has grown significantly. And because the interest rates it charges are extremely high and if the loan is not paid back on time the total owed can mount up at a truly alarming rate, it has been branded as a pariah.

Some of the criticism is justified but two things seem to have got lost along the way.

The first is that many of these people do not have bank accounts but where they do it would be a lot more expensive for them if they ran up an unauthorised overdraft instead. The usual fee of £30 to £50 for bouncing a cheque is more than is charged on most payday loans.

Second, these borrowers are high risk and that, of necessity, means they get charged a high rate of interest. The alternative is not that someone will come along and offer them cheaper money; the alternative is that there will be no loans available to them at all.

It is an uncomfortable fact that poor people have always had to pay a lot for credit because statistically they are a bad risk. They don’t have any money, so it is a struggle to pay back the loan and in a significant number of cases they fail to do so. But most poor people understand money all too well — being far more careful than those of us who have rather more of it. So the second reality is that the borrowers almost all understand that they are paying a high price — borrowing £100 today and having to pay back £110 in a week’s time for example — and they do so not because they have been misled or mis-sold, but because they have no choice.

They cannot get the money from anywhere else. It is uncomfortably patronising for middle-class critics, most of whom have never been in such desperate straits themselves, to say that people who have run out of money should be denied this lifeline, just because it comes at a price which they the critics are lucky enough never to have had to pay.

Such sentiments will no doubt enrage the industry’s critics who have called in recent times variously for payday loans to be banned, to face much tighter regulation, or to be limited in how much it can charge its customers. And today they scored a victory when the Office of Fair Trading announced that it was going to refer the payday loans providers to the Competition Commission for investigation.

Just what the Competition Commission staff will make of that is anyone’s guess, but mine would be that it will not go down well. That body exists to look at major issues of public policy, at the structure of industries and the desired shape of the UK economy. Its staff did not join up to find themselves poking around in some tiny corner of financial services. Nor is it a monopoly. Indeed whatever else payday loans might be, the sector is ferociously competitive. Any walk through the poorer streets of our inner cities or a quick trawl on the internet makes that all too obvious.

The essential truth about payday loans is that you do not have to like them or to approve of every organisation which offers them to understand that they meet a genuine need and provide temporary relief for a lot of hardship. We might wish it otherwise, or prefer not to know that such a need exists but that is to deny reality of life for a lot of people in Britain today. Payday loans are a symptom of a problem, they are rarely the cause.

For many politicians that is an extremely uncomfortable message to have to live with. Thus the venom directed at payday loans is in part because they are a daily reminder of a massive social problem which our leaders would prefer did not to exist. Removing the payday loan industry from view would make it easier to pretend it doesn’t.